Which Type of Mortgage is Best?
If you’re a first-time homebuyer, the process of getting a mortgage can easily feel overwhelming – especially when you find out how many different types of mortgages there are. Most homeowners have five mortgage loans to pick from; however, each one of them offers something different. Don’t worry, though – we’ve simplified these mortgage loans for you so you know what works best for you, your family, and your current financial situation.
Types of Mortgages
As mentioned earlier, most homeowners will select from five different mortgages. These include:
A conventional loan
Government-insured loan
Fixed-rate mortgage
Adjustable-rate mortgage
Jumbo loan
Below, we break down each type of mortgage so you know who qualifies and what to expect if you move forward with that option.
What is a Conventional Loan?
A conventional loan is a type of mortgage that isn’t backed by a government agency. Instead, these mortgage loans are provided by private mortgage lenders, such as your local credit union or bank.
If you get a conventional loan, your interest rate will depend on your credit score and credit history. As such, these types of loans are usually aimed at homebuyers who have a good credit score, usually around 660. However, depending on the mortgage lender, it may be possible to obtain a conventional loan with a credit score as low as 620. If this is the case, your interest rate would be higher since your credit score is lower. Essentially speaking, the better your credit score is, the more likely it is you’ll benefit from a conventional loan since your interest rate will be lower over the life of your loan.
How Much Money Do You Have to Put Down with a Conventional Loan?
Most mortgage lenders require homeowners to put down at least 3% to move forward with a conventional loan. Conventional loan mortgages usually last for 30 years; however, depending on the situation, it is possible to get the lifespan of your mortgage down to 15 years.
What is a Government-Insured Loan?
Unlike a conventional loan that isn’t backed by a government agency, a government-insured loan is. Government-insured loans, also commonly referred to as government-backed loans, ensure repayment in case you default on your mortgage payment.
There are three types of government-insured loans:
FHA loan: A FHA loan can only be obtained from an FHA-approved lender. You can usually find out whether or not a lender is FHA-approved by either calling the financial institution yourself or by visiting the U.S. Department of Housing and Urban Development website for a full list of FHA-approved lenders in your area. FHA loans are more flexible when it comes to credit scores and down payments and are often referred to as a “first-time homebuyer” loan. In most cases, homeowners will be required to put down 3.5% if they have a credit score of 580. Or, you can have a credit score as low as 500 as long as you’re able to put down a 10% down payment.
USDA loan: A USDA loan is insured by the U.S. Department of Agriculture. This type of loan is optimal for those with a moderate income who are looking to settle down in an eligible rural area. With a USDA loan, “rural” doesn’t necessarily have to mean somewhere out of the way or rustic; an “eligible rural area” simply refers to a neighborhood that has a certain population number. Those looking to move forward with a USDA loan will be offered more flexibility when it comes to their credit score; furthermore, they don’t have to put down a down payment.
VA loan: A VA loan is a type of loan that’s backed by the U.S. Department of Veterans Affairs. This loan is only available to active military, veterans, and surviving spouses. Those in the reserves also qualify for a VA loan. These loans require no down payment or private mortgage insurance. They are also flexible in terms of credit scores.
What is a Fixed-Rate Mortgage?
Out of all the loans on this list, you’ve probably heard about a fixed-rate mortgage most often. This is because they’re one of the most popular among homebuyers. Simply put, a fixed-rate mortgage means that you will be paying the same interest rate for the entirety of the loan. The only fluctuation you may see per month will be your property taxes and homeowners insurance, which change from time to time.
Fixed-rate mortgages do include conventional loans and government-backed loans such as VA, USDA, and FHA loans. However, these types of mortgage loans can either be conforming, non-conforming, amortizing, or non-amortizing.
A conforming loan is one that conforms to the requirements set forth by the Federal Housing Finance Agency (FHFA). Non-confirming loans, on the other hand, don’t have to meet these requirements.
Many fixed-rate mortgages are known as amortizing loans, which simply means that your monthly payments will go toward your interest and principal. This is what allows you to build equity in your home. Non-amortizing loans, while not as common, offer homeowners lower monthly payments that may only cover your interest for a short while. When this period of low payments ends, you may end up with a balloon payment, which could put you at risk of losing your home if you don’t have enough money to cover the balance.
What is an Adjustable-Rate Mortgage?
While the interest rate with a fixed-rate mortgage doesn’t change, the same can’t be said for an adjustable-rate mortgage. With this, the interest rate is usually set below the market rate; however, this rate will increase as time goes on. In many cases, the rate for an adjustable-rate mortgage will be higher than what you’d pay for fixed-rate loans.
So what are the benefits of an adjustable-rate mortgage? With these types of loans, you’ll typically be paying less money than a fixed-rate mortgage for the first few years. Furthermore, they also offer lower payments early on and enable homebuyers to qualify for a larger loan. This may be attractive for those who expect to come into some money at a later date that will help offset the high interest rates down the line.
What is a Jumbo Loan?
A jumbo loan is a type of loan homebuyers can get for homes of significant value. These types of loans come in handy when the property is too expensive to qualify for a conventional, conforming loan.
In many cases, the maximum conforming loan amount is determined by the FHFA. They are usually for properties that cost over $647,200. Jumbo loans can have either a fixed or adjustable interest rate; however, they pose a lot of risk to lenders since they are usually not protected if the borrower defaults on their loan.
Individuals who have a credit score of between 700-720 qualify for a jumbo loan and may have to provide documentation of their health condition and provide the lender their tax and financial information, as well as get an appraisal for the home before securing the loan.
Find a Mortgage with M&M Mortgage
Finding the right mortgage isn’t always easy, which is why the team at M&M Mortgage is here to help. We can help you find the right mortgage based on your credit score so you can start looking for properties that fit your needs and budget. Call us today to get started: 651-639-9800.
